France mobile price war extends to 4G
For Iliad’s more than 7m mobile subscribers, Christmas came early last month when the French low-cost telecoms operator introduced 4G offerings at no additional charge to its existing 3G service.
Through Free, its aggressively low-cost subsidiary, Iliad then left another present under the tree: 20 gigabytes of data use as part of its 4G offer – almost seven times more than rival packages.
For the three larger telecoms companies in France, Iliad’s gift-giving came just at the wrong time: telecoms providers’ Christmas sales are a vital component of annual revenue. But the impact of Iliad’s move extends beyond just the holiday period – it has also ensured that a brutal, two-year-old price war is poised to continue well into 2014.
Rival companies have already started to cut their offers in response. Orange, the country’s largest provider by subscribers, this week plans to reduce its 4G prices via a €24.99-a-month package through SoSh, its low-cost unit. Next week will see a similar move by SFR, which is owned by the French media and entertainment group Vivendi.
The prolonging of the price war is bad news for Iliad’s competitors, which have heavier staffing and other cost structures than the relative newcomer. Since Free entered mobile telephony two years ago, companies such as SFR and Bouygues Telecom have scrambled to cut costs while reducing prices for consumers.
Like the others, Orange has suffered falling revenues from mobile telephony in France as a result of the strong competition. Shares in the company, formerly known as France Telecom, have slid more than 24 per cent since January 2012, when Iliad first entered the mobile market. Shares in Iliad have risen 64 per cent over the same period.
But the extension of the price war to the 4G service is particularly galling because Iliad’s rivals had seen the newer and faster service as the brightest hope of clawing back value in a sector where competition has pushed down average revenues per user (arpu) in recent years – unlike the US, where they have been rising.
Robin Bienenstock, an analyst at Bernstein, now believes that the spread of price competition to the new and faster 4G mobile service will continue pushing down arpu in 2014 by between 7 per cent and 9 per cent – from a drop of about 11 per cent last year. “We can’t see arpu stabilising this year,” she says.
The potential implications of continuing low prices, not least for the highly sensitive issue of employment, have needled the socialist government of President François Hollande, which owns about 27 per cent of Orange’s shares.
On the day that Xavier Niel, the French billionaire who controls Iliad, said he would extend 4G to the group’s ultra-cheap €2-a-month plan at no extra cost to consumers, Arnaud Montebourg, the government’s minister for industry, tweeted, “even more jobs destruction in the telecoms sector thanks to the excessive low cost of FreeMobile :-(”.
Minutes later, Mr Niel reminded Mr Montebourg that the sector has, in fact, added 5,000 net jobs since 2009 – in contrast to a much bleaker overall picture in France. Citing the latest industry figures, Mr Niel tweeted back to Mr Montebourg, “And your record, Mr Minister? :-).”
In the meantime, the country’s other mobile operators have argued that falling prices will make it harder for companies to keep up investment levels. In a recent interview with Le Figaro, Stéphane Richard, Orange’s chief executive, said: “In our investment and innovation-heavy sector, it is not always about looking for the lowest prices, but instead finding the right price.”
Like Iliad’s other rivals, Mr Richard is confident that Free’s late start in 4G – it only has about 800 radio towers in the country compared with Orange’s almost 4,000, and more than 5,000 in the case of Bouygues – and lower-quality spectrum will push customers to look for better quality and coverage elsewhere.
He said that his company was already able to supply 4G to roughly 50 per cent of the population, and added that 70 per cent of new sales were now coming from the introduction of 4G.
But Iliad is catching up. With a strong financial position – net debt is barely one times earnings before interest, taxes, depreciation and amortisation – and capital expenditure running at more than 25 per cent of revenues, the group says that it will reach 75 per cent coverage of the population by early 2015.
“The fact is that we just launched our 4G activities a couple of months ago,” Thomas Reynaud, the group’s chief financial officer, said recently. “We are going to roll out a network over a period of six or seven years that it took our competitors 15 years to build.”